The setup is just too juicy.
By Wolf Richter for WOLF STREET.
In my decades of looking at the stock market, there has never been a better setup. Exuberance is pandemic and sky-high. And even after today’s dip, the S&P 500 is up nearly 29% for the year, and the Nasdaq 35%, despite lackluster growth in the global economy, where many of the S&P 500 companies are getting the majority of their revenues.
Mega-weight in the indices, Apple, is a good example: shares soared 84% in the year, though its revenues ticked up only 2%. This is not a growth story. This is an exuberance story where nothing that happens in reality – such as lacking revenue growth – matters, as we’re now told by enthusiastic crowds everywhere.
Until just a couple of months ago, the touts were out there touting negative interest rates soon to come to the US and thus making stocks the only place to be. Those touts have now been run over by reality. Now they’re touting QE4 by the Fed, or whatever. And people were looking for any reason to buy.
The unanimity of it all was astounding. I’ve seen this before, but not in this magnitude.
And there is this: As stocks were surging over the past few months, investors with large gains who wanted to sell didn’t sell before year-end in order to defer that income for tax considerations. So there was reduced selling pressure from that group that would have liked to sell, and that will sell after the new year starts.
So I shorted the stock market today, December 30 – me who is on record of saying repeatedly that I would never ever short anything ever again, after the debacle of November 1999 when I shorted the most obviously ridiculous Nasdaq high-fliers a few months too early. They collapsed to near-zero, but not before ripping off my face.
But I changed my mind. The setup is just too perfect. A year ago, on December 22, 2018, as stocks had been plunging, I wrote, Nothing Goes to Hell in a Straight Line, Not Even Stocks. That turned out to be true – practically nothing goes to hell in a straight line. I expected a bounce. I didn’t expect that the bounce would be this huge. But now it’s part of the setup for shorting the market.
- I sold short the SPDR S&P 500 ETF Trust [SPY] the biggest and most liquid ETF tracking the S&P 500 index. It’s up nearly 29% in 2019, from already wildly overvalued levels a year ago, despite the drop it had gone through.
- And I sold short the Nasdaq 100 Invesco QQQ ETF [QQQ], which tracks the NASDAQ 100, the largest most liquid tech-focused ETF. It’s up 42% in 2019.
I have spoken out against shorting because the risk-reward relationship is out of whack. If you short individual stocks, the maximum gain if the shares go to zero is 100%, while the maximum loss is theoretically unlimited and can easily exceed the entire value of the bet. And betting against stocks by buying put options leads most investors to pay the premium and watch those options expire worthless.
The only way you can short stocks and make money reliably is if you have a large megaphone that is closely followed by algos, traders, and the entire financial media. You quietly take your short position in a stock and then announce it, and algos and traders react, and the shares plunge. That’s the only reliable way to make shorting work.
My little website isn’t followed by algos and can’t move markets or stocks or anything else, and that’s a good thing. I can say whatever I want, and nothing big happens as a result of it.
Shorting is socially frowned upon. It’s like you’re willfully trying to destroy people’s constitutional right to the pursuit of happiness. Back in 2017, NYSE Group President Tom Farley, famously told Congress, “It feels kind of icky and un-American, betting against a company.”
But I still won’t short individual stocks because they can get too crazy – especially Tesla, one of the most obvious shorts with an enormous amount of short interest outstanding. This in itself is practically a guarantee the stock cannot crash because short sellers become buyers to take profits when the price drops enough, and they put a floor under the shares. And the massive short interest makes TSLA prone to violent short-covering rallies.
This stock is a prime example of how crazy the market is. In the US, there were fewer new vehicles sold in 2019 than in 2000. Similarly, in Europe and in Japan. Even formerly booming markets, such as China and India, have now hit the skids in auto sales. For growth, every automaker needs to take market share away from other automakers – a tough game in a no-growth environment.
Tesla’s revenues fell 7.3% year-over-year in the third quarter, a steeper decline than the revenue declines at other US automakers.
At $412 a share, Tesla is valued at $75 billion. This is over three times 12-month revenues ($24 billion).
GM is valued at $52 billion. This is just 0.36 times 12-month revenues ($144 billion). By this measure of the price-to-sales ratio, Tesla, if it ever becomes profitable on an annual basis, is overvalued by a factor of 10 compared to GM.
GM at this price is still a sell, in my view. As for Tesla, in the optimistic scenario that it makes an annual profit of $1 billion, it’s shares would have to drop to $41 before they’re on the same level of overvalued as GM, and both would still be a sell at those levels.
So Tesla at the current price is one of the most obvious shorts in history. But I wouldn’t short the shares because they’re just too crazy, and because the short is too obvious.
Given how eagerly investors are betting on a big plunge, deeply out-of-the-money Tesla put options carry a big premium. For example, one contract (representing 100 shares) that expires in January 2021, with a strike price of $290, which is about 32% below today’s share price, traded today at $2,625 — another sign that Tesla has become one of the most obvious shorts out there. And that takes it off the table for me.
In terms of my SPY and QQQ short positions: they’re trades, not a prediction of where the market will be a year from now. They represent my expectations that the market will drop enough to make this worthwhile over the next few months.
If this math is successful, and I cover those shorts with a gain, it doesn’t mean that I therefore turned bullish on the market. On the contrary. In the larger scheme of things, stocks would have to tank a whole bunch more before I’d take a buy-and-hold position in the overall market. Happy New Year!
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Bravo Wolf – I do agree, I think we are definitely back in 1998-1999 territory. Or perhaps 1969 depending on how the next ten years play out.
I’ve been trying hard to figure out the best way to prepare for the inevitable crash. Apart from shorting two methods I’ve contemplated are 1. Building up a slug of gold and gold funds, obviously, and 2. Is following a 200 day moving average market timing model
Here is the logic for the 200 DMA model:
What do you think? Surely it gives you good upside if markets crush forward another 20% but with limited downside? Isn’t it hard to make serious money shorting the market
A double bravo on this comment.
Actually I find the 200DMA and the 50DMA and the death or golden crosses quite valuable.
However, the warning is today. The last golden cross was in March, and the market just melted up afterwards. But the Fed Repo put so much liquidity steroids that shot the market up like a rocket? I wonder what happens next.
While the 200 and 50 DMAs are great barometers or signals when to BUY and when to SELL, what I find hard is what is the signal to keep on accumulating. The risks are just impounding. Make sure the exit is not clogged.
Thing about steroids is they wear off. Repos are reversed minus the vig. So little net impact unless the volume of repos goes to astounding levels. The real question is the extent of the t bill purchases and if they are buying coupons at the fed.
Meaning little net impact during the time frame of the average repo, provided repo volume declines.
The thing that I find worrisome is repo money is by definition short term cash. Bets are being placed.
I wonder if the repo market is not fascilitating (for cronies) a massive potential swing trade like has been alluded to recently by wolf that has potential to occur during the time frame of the average repo.
I don’t know that average duration but on the surface they all seem to expire safely in the first quarter or before.
It is my opinion that repo was just an excuse to do QE4. Even months before this happened, I have always said here that the Fed will QE again because the levels of bonds held by dealers were historically high. Mainly due to too much Treasuries auctioned and the Fed manipulating rates down. How long the Fed can play this game is beyond me.
I am also predicting that the Fed will do another Operation Twist with the T bills it has. However, this time it will be mostly done as SOMA addons instead of buying from dealers. Hence it won’t be called QE4. Most of the T bills bought were 1yr and 6 mos. So the twist will be done near the middle of 2020.
I honestly think it is very shortly time to accumulate other things like gold through GDX and very stable short or medium term bond funds or bond proxies
Pretty soon these will become crowded trades as more people realise a tsunami is coming .
But technically S&P 500 200 DMA says to buy and it would need to fall 8% to trigger a sell
I am actually tempted to put a little money on a dip then ride a possible high then sell. This before I even think how to play short. I think the issue here is timing. I am in the camp of a bit more melt up before armageddon.
If you read Jerimy Seagals book ‘stocks for the long run’ he says that the very long trend for stocks in US is a little over 6% above inflation.( In some ways this is a normal equity 6% risk premium over t-bills the market usually approximates or 3% over 10 year. ) Its almost a law of enterprise and is true for many developed countries that 6% plus inflation is the long term trend.
Now using debt you can juice it like the past 10 years which has been 11.5% above inflation in US. It does not take too many IQ points to think next 10 years could be close to a goose egg but not in a straight line. If Wolf can hold tight I think he can do alright. The thing I like about buying and selling is you get to choose when to do it. Wolf only needs patience I think for it to work out.
Well see the Jeremy Siegel reference is a good one. He believes that the market has maybe another 10% left to run after Trump gets a signed trade agreement. However Siegel, Shiller and other economists all agree that the long term outlook is for 3-4% annual real returns of less. Before Vanguards boss died he said the same thing. Also, If you look at Shillers own research, the CAPE ratio actually suggests average returns of -2.8% per year for the next decade
So surely if the market goes down like it did in 2000 or 1970s then shorting isn’t going to work for long because the market will fall, rally, fall, in a pretty unpredictable slide
Whereas as referenced above a 200 day moving average trade will keep you permanently out of the bear market for the majority of it . And the back tested data works back to 1901
Gold is also great – GDX rallied from 2009-2012
What’s the logic for shorting instead ? Quick short term profit this year if it works ?
BLOMBERG BREAKING NEWS: MEDIA MOGUL LEADS WORLD BEAR POOL TO CRASH US STOCKS.
Wolf Richter, owner of contrarian economic site Wolfstreet and long time super- bear is thought to be not just the frontman, but also a player in an ultra-secret, Austrian- based cabal attempting to cause and profit from a 1929 type Wall Street Crash.
Comparisons are being to made to Jesse Livermore, aka ‘The Boy Plunger’ who is thought to have made a hundred million in the 29 October Great Crash.
Names of members in the Wolf Pack are rumored to include Soros, Block and Left. Persons with knowledge of the matter say that Richter, although on paper a relatively tiny player with a quarter billion invested, nonetheless is a lead strategist. Unlike Richter, senior players shun the limelight, but hope his high- profile megaphone assault on the market enriches them further.
The WH is reported to be coordinating with the Federal Reserve to determine the strength, depth and determination of the bear attack. Speaking on condition of anonymity, one chairman of an undisclosed Reserve Bank commented: ‘at least this Wolf isn’t hiding in sheep’s clothing’.
Good luck and I mean that Wolf
I short the markets and stocks. Just covered my short on NVDA
I agree that it’s ridiculously parabolic. One day it’s going to pull a Toonces (see Saturday night live for that reference)
—-a fellow ursine—
Actually, I think you should have “The Boy Plunger” T-shirts made up for yourself…
Short the U.S stock market indexes when the U.S. dollar puts in a bottom not when its near a top. The U.S. dollar will likely top around August or September 2020 and not see that top for several decades again if ever. My guess is the U.S. dollar will bottom around the end of 2021 or the start of 2022. 2021 should be a stellar year for gold with the price of gold doubling.
Jesse Livermore’s stock trading theories eventually failed, and he lost heavily. Deeply in debt, married for the third time to a socialite/sugar baby on her fifth marriage (two of whom had committed suicide), and depressed, he shot himself in 1940.
So much for his brilliant life
Buying gold is too obvious also. Everyone is talking about buying it. It can’t be the simple.
don’t bother on average market goes up 8-10% of the time every year just invest most of your net worth into a passive ETF and contribute monthly .
This market is no different. i think going forward the net gain should be in the range of 6-8% P.A base on the new long term yield curve formation.
Timing the market is hard if buffet can’t do it i am sure none of us can else we would all be trillionaire. The point in investing is not when u buy but how many percent of your net worth gets involved in the market.
There is no point to invest a small portion of your net worth in the market. It is better to use the money to buy luxury items as the price inflation of it is much faster than the appreciation of your net worth if only a small percentage was being participated.
Last year the S&P 500 increases by close to 30% if 85% of your net worth gets vested you would be up by 20%. This is increment of your net-worth…
No point in having delay gratification if there is no participation in the market it is better to have instant gratification at least u be happier.. my 2 cents.
Shorting anything is the easiest way to make serious money in the financial markets. When asset prices rise, it’s usually over time. When they fall – it’s dramatic, any trader will tell you this. I would NOT be net short here, you’re stepping in front of a freight train. Wait for the turn, then use the futures mkts to get short. Just my opinion.
The 200 day is way late for me, in determining crashiness. It’ll be just as likely to be strong support for prices going back up. Same deal with the “golden cross.”
Then again, I maintain a constant bearish posture by being severely under-weighted in a buy/hold portfolio. What I mainly do to make money is buy dips in scales and sell in scales, after strength. Imperfect, yes. I under-perform (but still make money) during this type of market now, strongly outperform during sideways markets and strongly outperform during crashes (assuming I can keep the buying to a minimum during the really heavy selling.) Using this method, it’s important that I don’t chase too much during times like this.
There are a bushel-full of reasons why this thing should crash.
Amen. The biggest risk that I see with shorting the market is that it is like gambling at a billiards or roulette table at which your opponent has the right to pick up and move the table around to ensure he gets his desired results. The “Federal” Reserve manipulates the market to protect its cronies.
The only way that I see to safely gamble in our stock market is in specific companies which have financial results that they cannot easily manipulate. Despite all of the indicia, e.g., price earnings ratios and enormous corporate debt, I would not want to short the entire stock market or even a large number of its stocks. The risk from financial manipulation by the “Fed” to benefit its cronies is too great.
As to holding precious metals, I recommend that you read the agreement with any precious metals exchange traded fund very carefully, before you invest in it. Precious metals held physically might also be seized by the government as they were in 1933 under executive order 6102. If you hold substantial amounts of precious metals, you may be called a “hoarder” and forced to turn them over. Hopefully, coin collectors may be exempt as before.
You may have scored a win with your shorting of the entire market right now. The following events might cause substantial drops in stocks. The Iraqis apparently just voted to expel the US forces.
If that is carried out, which their supreme leaders might not allow, we may soon have a powerful, solid, Shia power block in the middle east causing the Saudis to shake in their sandals. The Israelis also sought to weaken the other regimes in the area. For both, this unexpected result might become a nightmare, ultimately, if that power block got even a few nuclear weapons from Pakistan.
Wolf, you may be right, and not trying to make a contrarian argument, and you are better informed than me, but I would never short the entire market. Rather, get out of it. Cash on the sidelines until it is in full free-fall. Timing is incredibly difficult to predict. Stay on the sidelines.
‘Don’t fight the Fed (and their plunge protection team).’
They might allow a marginal correction, but that’s likely to be about it because just as interest rates cannot rise significantly so too stocks cannot fall significantly, otherwise the global economy will collapse
Microsoft and Apple alone added half-Trillion dollars in market cap since the Fed started not-QE4. And they only printed $400B.
Who will be world’s first Trillionaire?
According to some informed sources there are already a couple of trillionaires, well known but not often in the public glare, just working quietly behind the scenes. (hint: they ‘aint working for thee & me..)
You need to add the money coming from overseas.
Fast forward to 2021 when all the money leaves U.S. stocks as the U.S. dollar falls off a cliff.
Just did the same, bought a couple of short term puts on SPY. See if locking in gains and tax sales rings true. Also a little longer put on Tesla. Your concerns are noted, but it is down from the $430.00 high now. I bought at 415.00 so we’ll see.
“‘Don’t fight the Fed (and their plunge protection team).’”
Yeah. I remember hearing that every day 2007-2008. Didn’t really work, did it?
Worked for someone.
Long dated deep out of the money puts?
Right, as long as market keeps falling at faster rate than your options decay. If you time it right you may just break even.
Very intelligent observation. It’s the decay in options that will keep one awake at nights.
You just buy them each month with every passing month.
Out of the money puts appreciate faster during rising volatility. The puts might never go in the money but you can make a return on them anyway. Investment banks like to sell puts in volume and collect the premium (using your portfolio to meet margin requirements). Put sellers were exposed during the crash of 87′. Now they write derivatives, SWAPS, all sorts of third party contracts. How the system winds down in this instance, remains a question.
I know so many people who hate the run-up, but want to defer the tax hit to 2020. Concur on January selloff.
This is the first I’ve heard of that theory of a January well-off. I sold back on Dec 24, partly because I thought end of year forced disbursements might tip the market, and I wasn’t in a position to watch it closely with a family over for the holidays.
I’m still nervous about the market, I can’t help but think that the huge balance sheet re-expansion pushed this last market move, and absent another big balance sheet expansion we may see buying pressure subside.
I think Powell will be reluctant to increase the size of the balance sheet much past the prior peak.
Even though the repos themselves are short-term, the debt is still absorbed and re-invested more generally. It has a significant impact.
Very interesting…I have been reading you for a while and those industry specific article are gold.
So what are your views on emerging markets and economies around the world? They surely represent more opportunities since they are still unfamiliar to most ?
Happy New Year from the 2nd biggest housing bubble in the world!
I thought Tesla, Netflix, Uber, Lyft, real estate, etc. would have gone the way of WeWork or at least scare the markets into creating valuations based on the fundamentals by now.
“The market can remain irrational longer than you can remain solvent.”
Good luck with your bet, but I think Donald Trump is going to do everything in his power to keep the markets up until at least November 3, 2020.
So maybe on 11-3-20 at around 3:50 pm might be a good time to buy some of those Direxion inverse ETFs?
The market only stays irrational on the upside . It’s very rare for it to be irrational to the down side. So really, the quote should be, “The market can stay overvalued longer than you can stay solvent, if you short it.” Long periods of irrationality are the norm for stocks. With short downside plunges every so often.
Good luck Wolf!
I hope that this is your trade for 2020.
Happy New Year and thanks for keeping up your blog
The Federal Reserve was willing to pump half a trillion dollars into the banking system in one month to keep the “everything bubble” from popping. ZeroHedge just published an article where an analyst claimed that there is about a 1-to-1 correspondence between the Fed pumping money into the banks and the stock market inflating even more.
If the Fed can create infinite money out of thin air, and the Fed is willing to destroy the dollar to prop up the financial markets, then it’s not immediately obvious that the bubble will pop in the conventional manner, as in 1929, 1987, or 2000.
The Fed seems to be willing to risk a currency crisis that turns US dollars into Zimbabwe dollars, instead of accepting a market crash.
It’s possible that the stock market numbers will go up and up and the actual value of the stocks will go down and down, if the currency crashes faster than the market bubble is inflated.
You might be ‘right’ in terms of the *true* value of stocks, but wrong in terms of the *nominal* value of stocks. If the Dow goes to 40,000 but the dollar implodes to the point where oil is $200 a barrel, then the numerical value will be more, but the actual value of the stocks will be less.
You are making an implicit bet that a stock market crash will NOT be coupled with a currency crisis. It’s all a matter of timing.
At this point, just holding onto any financial assets denominated in US dollars is becoming risky.
As an aside – I was washing clothes, at $3.25 per load, and found an old 90% silver pre-1965 quarter in the roll. It was worth $3.08 at that time, which was almost as much as the 13 copper-and-nickel quarters that went into the machine. That’s a slow rollout of inflation over 55 years. I expect that once the Fed panics, things will go downhill much faster.
“The Federal Reserve was willing to pump half a trillion dollars into the banking system in one month…”
Not in “one month” but since September (4 months), and not “half a trillion” but $400 billion.
I know I’m splitting hairs here, a hair by now being $100 billion :-]
You can drive a truck between what the Fed talks about and what it actually does. But there has always been a high CORRELATION between the Fed B/S and the level of the S&P in the last decade. Maybe it’s a good thing to follow liquidity creation.
It’s not worth it to argue for too long over a mere $100 billion, but ZH reported it as almost $500 billion for December 13 through January 14.
“There’s more: add in the incremental liquidity from the expanded overnight repo of about $50 billion and another $60 billion in T-Bill purchases, and the Fed will inject a total of just shy of $500 billion in the next 30 days!”
But what’s a mere $100 billion between friends these days?
Happy New Year.
This is a ZH projection from Dec 12 for Jan 14. It assumed that every repo offering would be fully subscribed. But the repo operations have been underubscribed recently. The repo chaos has totally settled down. So I doubt it will get to $500 billion by Jan 14.
Did you see that REVERSE repo was a whopping 64.087 Billion today? Was there too much liquidity?
Oops you already answered this below.
The point you need to keep in mind is the $400 billion went to the very banks that own the Fed, and the New York Fed runs one of the largest trading desks in the world- in other words, they have almost unlimited funds to screw anyone’s short position, no matter how how overvalued your target. My bottom is still sore after covering losses- yes, this year- in short QQQ positions (and I am now on the wagon you have just fallen off).
As for the 200 day MA and the 50 day MA, millions of punters watch those, too, so no one is getting a leg up on the boys at the Fed trading desk trading off them, either, IMHO.
All true,however,the “market” is all about Psychology. no money printing machine or PPT will ever overcome Sentiment. once a significant down draft happens EVERYBODY will scramble to save their Hides,from Mom and Pop investors to hedge funds etc. will it happen in 2020? my bet is 1st or second quarter and i am slowly building positions accordingly. neither Mr Trump nor the Fed will ever have the power to negate the forces of Nature. the market has and will ALWAYS “re balance”,just waiting for the Trigger.
“they have almost unlimited funds to screw anyone’s short position, no matter how how overvalued your target”
Agree, almost entirely….but I wonder if some lessons can be learned from those few Co that have in fact collapsed over the last ten yrs despite the ocean of Fed Fiat that has inflated everything else in aggregate.
For instance, well over 100 energy cos managed to go bankrupt and even ultra cheap money wasn’t enough to save them.
The specific Dynamics of this failure (beyond oil going from 110 to 50) might provide some insight into which other sectors might strangle in the midst of plenty.
At some pt, lenders will turn off the tap – even under ZIRP. The question is what metrics they use to do so – in oil, it was probably the biannual revaluation of oil reserves.
I imagine bankers use other (less precise) metrics for other industries.
Recall when the Chinese stock market started to plummet a few years ago. The response was to make shorting illegal – the PBOC then bought up the market massively.
Whatever it takes = WHATEVER it takes. In both words and actions.
At some point no matter what they do (even if that means pumping out a trillion dollars per day), the Fed will fail.
Anyone short the market should very quickly open a few bottles of expensive champagne and gulp it quickly.
Because when the central banks lose control of this bucking beast, the next thing anyone opens is going involve a can.
If one cannot short stocks, then writing options (puts) becomes a much more hairy business than it already is.
Straightening up the proverbial line to hell, for a faster ride!
I hope you make a fortune
That of course means millions will lose their jobs
Yeah, that is true.
I suppose the proper wishes would a ton of beer money on the bet, and/or future interesting dialogue.
The S&P 500 can go down 20% and not trigger any layoffs at all. Employment is not tied to stock prices unless there is a crash (something like -50% or so) that starts to impact the real economy, which I don’t expect happening in 2020.
Where the market ends up and how many jobs are lost seems to me more dependent upon what happens in the bond market. If the loss in value of stocks affects the ability of Unicorns, Zombies and everyone else to borrow more or refinance and or the real interest rates spike upwards then there will be no telling where this ends up. Or how many jobs will be lost.. Or how it affects house prices, especially in Unicorn territory.
People think that interest rates can’t go up if the FED is lowering their rates but the 10yr has moved from what 1.4% to 1.9% already. This is while the FED has been lowering its rates and putting 400 billion$ back on its balance sheet.
To me, this is as big a reason to short as any stock pattern.
Or, the S&P stays at nose bleed levels and layoffs still happen. I see reports of 3,500 railroad workers now on layoff with traffic down (thank you tarrifs) and tech efficiencies reducing workers. Imagine a 2.5 mile train on tracks being run by only 2 guys. If Transport numbers don’t show dark clouds ahead, then nothing does. I don’t care what the FED does.
The stock market is overvalued. We all know it. People are going to lose their jobs when the musical chairs stop. A reasonable person making a short bet isn’t wishing ill on anyone, they are making a financial calculation.
I was making this point on another website. It seems obvious that many people will sell to avail of capital gains tax free allowances, etc once the new year comes. I’m not sure why it’s not talked about more. I read a lot of blogs and websites and this is the only time I’ve seen it mentioned (I’ve been holding off selling more until Jan 2nd because of this). Having said that… it would be ironic if everything crashed today. Maybe we shouldn’t be alerting the algos.
Good luck Wolf hope that pays off.
I’ve bought tvix in it’s lowest range 49~51
And have several GTC+ sells at different price range. 150 200 250 and on ?
I guess we just need that rollercoaster party going.
Happy 2020 to Wolf and it’s readers, except any random communist that sometimes passes here
I like the megaphone color, heard a lot about it yesterday. I still think oil is higher no matter what they say. There seems to be many pitfalls within this market. (entire). Thanks for sharing your thoughts on shorting.
“Oil is highter”.
Oil could rise as soon as the fracking scam starts to leak but no one knows when that will happen. Fracking seems to be still going and has pushing the USA oil prices down. And yes frackers are losing more and more money but so far that has not translated into anything but warnings.
The real wild card on commodities is Russia. It hold large oil reserves that need no frac, and hundreds of trillions of cubic feet of natural gas. It holds 90% of nickel and palladium reserves. Did you notice palladium is more expensive than gold? It has actively been trying to decouple from the dollar to make sure it is paid in a fair price for such things. To know what will happen on those commodities is to predict Russia, which is nearly impossible, by design.
I love the new Wolf. I hope we see him bolder and angrier for 2020. Now he has skin in the game. Terrific.
I usually have some skin in the game. But I have tried very hard not to let my skin in the game interfere with my analysis. This is very tough. Once you have skin in the game, your thinking tends to change from analysis to wishful thinking.
So generally, I don’t invest in companies or commodities that I discuss, or after investing in them, I stop discussing them – because I have noticed how my thinking changes from analysis to wishful thinking, and that wasn’t a good feeling when writing an article once I discovered the change (it wasn’t obvious to me at first).
That your thinking changes from analysis to wishful thinking once you have skin in the game is an issue for all investors who do their own analysis.
But I’m now experimenting a little (as I did here), to see if I can let my skin in the game overlap with my articles, and share some of it. I want to see if I can keep it straight. I’ll do it only occasionally, sticking to broad moves, such as overall market moves.
This also sets me up for being a target for even more potshots. That’s fine, that’s part of the fun of sticking your neck out and running a website :-]
Wolf, you’re great. Just make money and forget the critics.
You are definitely entitled to bet on your analysis.
We are just putting money where our mouth is.
I did. I want to do more. Happy New Year.
Classic wolf. I love your analysis and credulity at the irrationality of current markets. You have one of the few holistic views on monetary policy and asset prices that stands up to rational scrutiny. I hope you make money on your shorts, at the same time, some TSLA investors are making money going long, i.e. it’s an irrational market.
Wolf, what you’re not factoring in – and the proof is that you don’t even mention it – is the enormous amount of fuel the Fed is pumping into the system monthly. With that in mind, it is impossible to state with any degree of accuracy at all, when the market might turn. And this from the most bearish, pessimistic operator of all of mankind: me.
Yeah, I didn’t mention it because I’m going to write a whole article or two about it at the end of the week, when we get the Fed balance sheet and the minutes.
That flow of fuel seems to have slowed down already. Repo operations have been undersubscribed over the past few days, down to just a trickle. There has been no spike in repo rates yesterday and today, unlike last year on Dec 31.
This means the Fed brought the repo market in line, and is likely to back off meddling in it. I expect the T-bill purchases to drop to a trickle. I expect the MBS roll-off to continue at around $20 billion a month, and I expect the balance sheet growth to slow or end in early 2020.
64B today in Reverse Repo, and 25.6 Repo fully subscribed. There is some concern about end of the year liquidity issues.
That $64 billion reverse repo today was a huge move, but reverse repos are the the opposite of repos, where the Fed SELLS Treasuries and takes in cash. They’re on the liability side of the balance sheet, not the asset side. They remove liquidity. With this reverse repo, the Fed removed $64 billion in liquidity.
I think this was the single largest one-day liquidity removal this year. Looks like the Fed did this because the market is drowning in liquidity, after all the Fed’s actions up to now.
How are these huge swings in liquidity not a sign that the Fed has lost control over the financial markets? Didn’t 2008 start out the same way?
The demand for repo depends on a lot of things.
I can think of two major dependencies.
One, the level of excess reserves more or less determines a rough estimate of liquidity.
Two, the level of securities (Balance Sheet) of dealers determine how much needs to be financed in repo.
Bank Reserves are up now to 1.65T. How much of this is really excess and available to lend is beyond my pay grade. However, I think there is no shortage of reserves.
The Balance Sheet (of Securities) of dealers usually drops at year end. Currently, they have about 195B is Long Term Treasuries. You can also view this as a lower level of collateral to use by dealers to borrow and lend at repo. We have seen lower levels before so this ain’t an emergency. Since there are lots of reserves, then I assume there is nothing to worry about.
The question now is IF and WHEN the Fed will remove the liquidity they just introduced. Timing is important. It is possible to bet too early.
Hussman’s Jan article has an explanation towards the end. He says it’s not QE but it’s all over my head.
That’s the big question, isn’t it. Will the balance growth slow, or continue to grow, at least in gyrations. We seem to see your conclusion, with the pulling of the unicorns horns.
Do you have a stop loss??
No, but plenty of liquidity (cash) to absorb a loss if the market goes the other way before I cover.
Wouldn’t the Fed want to take the pedal off the gas and settle the market a little releasing a bit of exuberance, perhaps even letting it slide back slightly, before pushing the pedal a little hard once again.
Could it be that the FED/Treasury has somehow bullied the banks into lending to each other? Possibly threats of increased regulatory burden? As far as I know we don’t see much data on individual overnight interbank lending other than the rate that appears. I remember immediately before the first bailout when Paulson got the bank CEOs in a room and told them they couldn’t leave without signing the paper and taking the money?
After all, it’s only money. Oops, I forgot…they’re banks.
AC/DC “Shoot to Thrill”
Wolf has just pulled the Trigger. ..
Keep up the good work,,, really enjoy your site and commentary..
I keep wondering when all that federal borrowing for entitlements is going to blow up…
Happy New Year all….
Good luck it does seem juicy. But I have been burned so many times I need an asbestos suit.
And the most obvious setups usually return the biggest losses.
I am patient in short term bonds, knowing there will be many 10 baggers down the road. Every $1000 you lose now costs you $10,000 in opportunity cost. Shorting is tempting, but I think patience is better. Shorting with some play money to have fun is OK, if you cut losses early.
Crazy to short equities when USD is bearish.
Will a cheaper dollar be enough to draw a lot of investments or hedging from overseas?
I guess we might have to count China out of the game.
There is a theory going around that a weakening dollar and weakening equities can combine to cause a real move. A lot of foreign money has come into the US looking for yield, but it is not hedged. So if the dollar starts to weaken we may see selling of US assets and that can mean drops in equities that accelerate if the dollar continue to fall. Note that the US dollar, having been kept high by the flow of foreign money into the US, is ripe for a reversal, and likely an epic one as well (not based on fundamentals, but based on flows). Note too that the market seems to have not yet awoken to the fact that Trump will lose … and markets will not like that when it happens.
In that scenario, why would a drop in US assets cause a drop in equities ?
Good luck. But you may get burned. Dow 35,000 is on the horizon.
USD is falling (good for exports). China is recovering. International trade wars are easing. Brexit is done. 5G is soaring. US corporate taxes have almost halved. The US Fed has no rate rises until 2021. Trump will have some election giveaways up his sleeve. Global GDP is growing again.
That all points to yet higher profits for US companies in 2020.
If the Fed could reliable do this, then you have to wonder why they didn’t do it in 1929, 1974, 2000, or 2008? Apparently, they are restricted by reality.
These items have flip flopped so many times the past year, it is like reading daily articles at marketwatch. Good luck with your prognostication!
These items have flip flopped so many times the past year, it is like reading daily articles at certain web sites. Good luck with your prognostication!
Sorry for the duplicate post.
Interesting. I shorted a block of SPY and pulled all of my 401K out of the market two days ago because of similar thinking. Too much irrational exuberance. Reminds me of 2000.
Container traffic through the Panama Canal from the Pacific Region (chiefly China and Japan) to the Eastern US seaboard grew 9% in FY2019 over FY2018. Petroleum products traffic (including LNG) from the Eastern US seaboard to the Pacific Region grew 4.3% in the same timeframe.
There was never a “trade war” of any kind, shape or form outside of a well orchestrated PR campaign by the US and Chinese governments and as usual Westerners believed everything their media told them because doing otherwise means being a tinfoil-hat-wearing conspiracy theorist.
The Chinese government can manipulate literally every economic data you can think of (or should I say their economic data respond to how they are observed by outsiders?) but cannot manipulate imports of capital goods from abroad, which have been between crummy and disappointing all throughout 2019. This is not because of some apocalyptic event but because the world went on a spending binge in 2016-8 and the demand for capital goods of all kinds is likely to remand subdued for quite a while.
This doesn’t need to be catastrophic, but capital goods manufacturers have become accustomed to a certain level of orders (as I like to say they promised the wife a shopping spree in New York at least once a year) and they will leave no political stone unturned to get back to those levels. As usual the remedy is likely to be far worse than the troubles.
Finally there’s another issue. Many US companies have relatively high profits because they operate in an protected market: just look at the Three Sisters (American, Delta and United Airlines). Their profits are so good because they exist in a cartel which includes pretty much every single US airline, down to Spirit. If, say, Spirit stepped on American Airlines’ toes you would see the lobbyists in Washington enter hyperdrive mode.
And Apple has just been lucky so far: they are basically the only alternative to Android. They can tout their “shift to a service model” as much as they want but iTunes has dozens of competitors worldwide, from Google Play to independent record companies’ stores.
Finally I am firmly convinced the Fed bonanza will last until November 2020 (guess why), after which all bets are off the table.
US financial markets will likely continue to benefit from financial repression abroad, which is very likely to increase this year: all the world is piling into US assets and the trend is likely to continue.
But high prices are their own worst enemies, or so they say.
Personally I do believe the real bubble in US assets is not in financial assets but in real estate, because at the end of the day you need flesh and blood humans to buy or rent it from you to turn a profit, but that’s another story for another day.
This is why I don’t short. The market is very predictable over 10 years (guarantee low returns as measured in 2030 relative to 2020), but no one can reliably predict the next few months or year or two, and irrational ralliess can bankrupt a short position.
But I would like to see Wolf make a buck on this!
what could go wrong??
China just had its largest SOE bond default, Teewoo, located in also broke Tianjin. It also just did an emergency reduction in the reserves a bank needs.
In the months of late November to December it had 4 bank runs with the crowds lining up ignoring small gifts to keep their money on deposit. Like Teewoo, all these banks were guaranteed, but no one in China really trusts the government.
Teewoo was (and is) big. But on revenue of around 60 billion it made about 120 million profit, which we would call roughly zero, but given Chinese accounting for an SOE, is more likely negative.
A senior CCP politician has become upset and threatening to bankers who are trying to rein in the SOE’s saying: ‘Certain banking cadres have forgotten what it means be a CCP member and could be stabbed in the neck’ (I assume this just meant demotion)
XI has just ordered the creation of a high level panel of finance experts to focus on sudden black- swan events that could spark contagion.
A lot of China’s borrowing has been in dollars or denominated in dollars and unlike the US Fed it can’t print them.
A few years ago Canada’s CBC ‘borrowed’ a comment I made on WS, that China’s deep dive into capitalism and credit was like the sorcerer’s apprentice in Disney’s Mickey Mouse cartoon. China has discovered the magic wand of credit but doesn’t really know what it’s doing.
China expert Ann Stevenson-Yang heads an outfit with the difficult task of getting China’s real numbers. She was first to use electricity consumption as a gauge, then the CCP started manipulating that. While looking into aluminum production ( they are drowning in it) she found one plant that wanted to shutter but its SOE bank wouldn’t let it because then it would have to report a bad loan.
A couple of years ago when the CCP was still stuck on 7, or maybe 6.9, she thought GDP growth was flat. No one really knows what it is now but we do know that a very large component is real estate ( the ghost cities), probably a larger % than the US before its crisis.
Worth reading this article by Jim Bianco about a possible correlation between the Fed’s new repo operations and the stock market: https://www.biancoresearch.com/182754-2/
Yeah but where is the inflation and the excuse to increase rates?
Doubt they will do anything drastic in an election year.
I will wait for the downturn before I bet.
Inflation can be found in the stock market. Also in real state and college tuition.
When people speak of inflation they are referring to inflation in the prices of goods and services. The rate of inflation, as measured by the Consumer Price Index (CPI) or the Wholesale Price Index (WPI), has nothing to do with the stock market.
Also college tuition is only rising about 3% or 4% a year.
I checked several major colleges and some local colleges and that was what it was for them also.
I think the fix is in. The Fed will throw as much money as needed into the market to assure the market continues to rise until POTUS is re-elected. After the election, the market will plummet, creating a crisis that Trump hopes to use in his favor. Even if he loses, Trump may refuse to leave office due to emergency conditions resulting from the market crash that he precipitated via manipulation of the Fed. But I hope you are right. A correction here would be better than a crash later.
Best of luck but with the Fed about to launch QE4Ever this could run a bit longer yet.
I agree, Robert Miller, the market goes down
if-and-only-if the Fed allows it;
after the election, maybe.
“the invisible hand of the market” has been dead for 30 years. Money goes where government wants it to go.
We’re in the beginning of the biggest QE ever which will create gains similar to 2013-2017, maybe bigger. Government prints money so assets go up. A 1% incease in the FED’s balance sheet = a 1% gain in the sp500.
Government wants the middle class to not get good wages and to be stuck with student debt so they are. Government want the 2017 tax scam to have billionaires pay less taxes than the middle class is billionaires get rich while the middle class gets crushed so that’s what happens.
Everything is controlled by the government so don’t fight the sp500 when they’re going all-in to pump it.
“Everything is controlled by the
governmentoligarchs who control the government.” FIFY
I never understood the supposed control the Fed or other govt forces have over the markets. So, did they want the 2000-2003 bear market and the 2007-2009 bear market? Why didn’t they just take control?
I don’t know when the next bear will start, but my indicators say it’s too early to sell/short.
The FED actually raises rates substantially after the bear Sterna collapse. So yes in retrospect they “wanted” the 2008 collapse. The fact is they were just incompetent, not wanting it, but they did everything the accelerate the decline out of ignorance.
Additionally, there’s a lot of discussion about how the 2009 repo market freezing caused stocks to implode due to forced selling by banks. In 2009 the fed did not buy assets in the repo market, in 2019 they did.
These don’t have to be negative things. A fed optimist would say that because the fed is keeping rates low and buying assets and back-stopping the repo market this is a positive evolution of government regulation of the capitalist system and it’ll result in prosperity forever. Others say it’s just a fake high of a drug and every hit just makes the withdrawal that much worse. But even the pessimists don’t argue with the fact that drugs really do get you high and they are very powerful – just like the fed.
I was considering to make a small short stab with non leveraged, slow moving inverse ETF: HDGE. I almost did, but changed my mind because of ongoing QT4.
Good luck, hope it works out!
Btw, I do have few long mining positions, will see if they get pulled down with the market. If so I will be adding to them.
I can easily see a 10% correction in January.
After that, I see yet another massive short squeeze.
However, Presidential Election years can be super volatile, so buying the VIX is another route to consider.
P.S. Good luck with your big short.
Don’t know about you guys. But I actually bought and sold the S&P (etf) on the crazy ride upwards after the Fed Repo. I considered it a test too good to be true. No point in me keeping track of the numbers if I couldn’t make some money on it.
Galbraith said that there are two kinds of investors in a bubble: those who think the bubble will go up forever, and those who know it’s a bubble but think they can get out in time.
Corporate investment is running about half the level of the 1990s, yet profits haven’t collapsed (yet). Minsky stated that profit equals investment plus the government budget deficit. It’s likely that the deficit has replaced a portion of investment spending by companies.
Congrats Wolf for your courageous shorts: 1 share each of SPY and QQQ
I would join you if my previous disastrous shorts hadn’t destroyed me.
Yeah, like the candlestick phenomenon that rips your stomach lining out before the pullback.
I could see why you shorted. Sounds very logical. From valuation we are maybe around 96% percentile. Hussman got burned going negative too early not realizing that Fed changed the game. He has been negative for most of 2018 and 2019 as valuation is way too high and internals are negative.
Big risk is Fed’s change the game again. If I had to go long or short I would go short, but I basically am in short term treasuries waiting it out. Own one stock because I think it’s cheap.
Hussman has been negative for so long that his cumulative loss is now bigger than the 2008/09 SP500 crash. Check the numbers. His LOSS is that big, not his underperformance.
Of course, if you point that out to him on twitter you get blocked and then he mumbles about “half-cycles”.
That’s true. Even dumb little me wondered would his strategy work if we had Zimbabwe printing. But he is a smart disciplined guy and if market revisits 1000 he will look pretty smart.
He and Stockman basically believe money printing is fools gold and it’s all going to come crashing down. Stockman for the most part has told people to sit in t-bills and have some gold in case they really make a mess of things. Buffet seems to know the big picture the best. Go all in at the bottom and by the end of the cycle make sure you are reloaded with cash. But you have to be ok with losing 50% when the bubble bursts. I don’t want to do that again.
Stockman would hav cost me 500k had I listened to him in 14 when I first discovered him on ZH.
He’ll be right someday but I’m generating great returns while he’s trying to get people to subscribe to his Overpriced doom porn newsletter.
Stockman:betting against America since 82.
What stock is that Old-school?
I bought shares in SKT. Its a local stock and I feel I understand it and picked it off most shorted list. It got sucked down with rest of retail REITS. I might get burned but feel like it’s worth more than current price. Funds from operation is around $2.28.
SKT is an outlet mall REIT (Tanger…). I hope these stats are correct, but I’m not guaranteeing they are:
The stock has 102% short position against it and that has risen over the last year from a significantly high level earlier. And it carries a high debt ratio. Dividend yield is over 9% which I’d guess is unsustainable. It’s trading at 53% of its high for the year even though it’s had about 5 years of price decline! It’s profit margin has had a steady decline over several years, but it’s revenue has climbed consistently (although it’s recently flat-lined). It’s PE has been elevated, at a 5-year average of 47 and, arguing in favor of a value play here, is now at approx. 11.
Personally, I’ve been tempted for about the last two years, and thought, “maybe all the brick n mortar doom has been priced in. But I haven’t taken the bait. I’m thinking that a correction is a’comin’, like Wolf is positioned for, and also thinking that a dividend cut will occur, and, maybe then, I’ll put my toe in the water.
Market is overbought, but it would take a catalyst to create a huge short opportunity in the S&P 500. I doubt the catalyst will come from the Fed. A cascading disaster in the corporate bond market would do it. I like Bill Fleckenstien’s way of shorting, “shoot em in the back.”
Hmm a catalyst? They abound, starting with Iranian sanctions, another airstrike, increasing protests and perhaps another ME proxy war driving the price of oil to the moon. Think about it. If you were in Iranian leadership and backed into a corner would you roll over then walk away?
The list is endless, but the above seems beyond logical and almost an unavoidable unintended consequence of political decisions made by someone who does not read or listen to others.
These times are not normal so predictions are chancy. But good luck Wolf. I hope you makes some cash with your courage.
Those things aren’t catalysts.
Those things have happened, on a near weekly basis, for the last 10 years.
And FYI. This isn’t the 1970s. OPEC isn’t a world dominant monopoly anymore and America actually exports oil/gas now.
“They abound, starting with Iranian sanctions, another airstrike, increasing protests and perhaps another ME proxy war driving the price of oil to the moon”
Send them another billion on a pallet and they’ll be nice.
Wolf, hope you will have a Happy New Year.
Your post has already made the rounds of other blogs where I lurk, such as Automatic Earth and Zero Hedge, where they have comment sections, too. Stealing a thought raised by a few commenters there and here, what would cause a major dollar-dominated liquidity crisis? It would seem that “catalyst”event would start the avalanche on the house of cards.
When corporate bonds become problematic, the Fed will buy them.
I have had several shorts in place. Shorted the market a few months ago and did well. Several Call options in place did good. I had some puts expire worthless. That hurt.
You have a hell of a crew Wolf. Usd down, equities down. 60 billion a month by fed2020. Pound strong, equities down. Oil selling before API. I could not short Wolf. Usd. down, oil down. Seems like profit taking.
The Fed’s new hangover cure: stay drunk all the time! Looking at history, the current economy growing at 3% is kind of a joke. During one quarter in the 1930s the economy grew at an annual rate of 17%, another quarter at 13%, stock prices stayed low.
In a real market shorting makes sense. But in a government manipulated market? I don’t know. It would be the the height of incompetence for the Central Banks to blow the greatest bubble In history and then let it get away from them. On the other hand, this idiocy can’t go on indefinitely, something has to give. So, good luck Wolf on your short….
If I were a conspiracy theorists, might think the Fed blew this current bubble deliberately and solely for the reason of popping it before the election.
To get rid of you know who.
But I’m not a conspiracy theorist.
Remember the Fed works for its owners, the major banks. Not the president, who appoints the Fed chairman that his handlers tell him to.
To me, trying to guess what the big banks will want is not a winning game.
This is why I will not short any more. I do not believe they can prop it forever, but they have succeeded in obfuscating clear entry points.
I do wish you luck though Wolf!
” I do not believe they can prop it forever, but they have succeeded in obfuscating clear entry points.”
That to me is so basic that anything else is just false “blue sky”!
Where are the “fundamentals” driving this market?
When the surrealists have to give up the game it will be spectacular!
Happy New Year all…..
And, good luck Mr. Richter!
‘It would be the the height of incompetence for the Central Banks to blow the greatest bubble In history and then let it get away from them’
Have you forgotten that they let the bubble pop up in 2000 and in 2008!
Will it be different this time?
It already is different this time. Well, it’s the same as always if you think in terms of Zimbabwe.
If you want to know if the American markets are a rigged game or not, consider “shorting is socially frowned upon”.
In the Land of the Free, people are only allowed to make bets that say the markets will go up. Bets that say the markets will go down are banned for most members of the public, and are ‘socially frowned upon’.
The capitalist equivalent of the old soviet regimes saying that anyone who disagreed with the state was obviously insane and must be locked up.
Interestingly, I just made the opposite bets with my tiny survival fund. My bet is that the Feds and Trump have reached agreement. Trump wants to be elected and the Fed is scared stiff of Sanders and even Warren. The Fed has thus turned back on the Wall Street Cronies Money Spigots, and will be pumping billions and trillions and basically whatever is required into Wall Street to make sure that the stock markets go up, up up and the threat of a government of the people, by the people and for the people is banished (again) from this earth. Its more of a political bet than an economic bet, but when betting at a rigged race track its better to understand the politics of how the game is fixed than anything in the racing form.
My bet is that The Beast will throw its hat into the ring at the last minute. Where to the Fed then?
Who’s not allowed to do what?
Frowns somehow have an effect?
I think Wolfie just shorted the Qs and the spider.
Nothing but bold ownership and large nads.
As long as the F.R.S. keeps feeding the financial terrorist markets with cheap money the only way is UP!
ZIRP/QQE and Trump’s desire for NIRP only points to the continuation of Wealth Extraction from the base to the top.
Tried to buy a scratch off lottery ticket at the gas station yesterday. Usually they have hundreds on display. They were totally sold out. Sign of the times, me thinks.
Wow, I guess more people than I realized flunked math and statistics. Lottery tickets = a tax on the mathematically and statistically challenged!
Happy New Year !
Some of these tickets cost $20 or more a piece and they were all gone. That kind of money is being spent by the “investor” class, not those of us hoping for a miracle(stats don’t apply).
That kind of money is spent by mostly poor people who can least afford to loose it but are lured by the desperate hope of “wealth”. the whole thing (lottery) is a criminal enterprise promoted by the state to fill the coffers of the state. the stated benefits to education and other social causes are proven to be marginal at best. but hey,it’s a free country and you can waste your money anyway you please. BTW your chances of becoming King of the world are ten times higher than winning the lottery,statistically proven!
I know the stats on lottery games, but did you know you can improve them greatly. I wasn’t trying to do that with my $1 bet, but there are Wall St. players pooling their money to game the systems. It’s not that hard to do.
Did you also noticed that among the Jeffery Epstein scandal tidbits, was the fact that he had won the lottery several times. This was the least surprising thing to me.
Not. They were Christmas gifts/exchanges.
Wolf, ive got the other side of this trade. I’m long and very long at that.
I think we’re going to see 40% gains over the next 24 months in a crazy late-90s style bubble. As a great man once said “the problem with overvalued things is that can just get more overvalued.”
As my case study let me point to Bitcoin and housing. The millennial generation has been as prone to jumping into bubbles, even insane bubbles like crypto, as any generation before. However they’ve stayed away from the stock market up until now. But humans can’t resist the stock market. From the south sea trading bubble in 1720 to the railroad bubble in the 1880s to the roaring 1920s to the 1999 dot com bubble every single generation answers the siren song to manically jump into a stock bubble.
Wolf, the central banks are pumping stocks like never before in history. Millennials are in their 30s, the prime age to start investing in the stock market. The real estate game is over the crypto game is over, millennials – desperate and in debt – are like a gambler ready to throw the dice at the next game for a chance to escape their financial hell.
I think the setup on the long side is tremendous. I’ve had a super bullish portfolio for a year and it’s going to stay super bullish for 2 more years. I’m going to exit to some poor bag holder at the top and get rich while they make the biggest mistake of their lives. The problem with overvalued things is they can just get more overvalued.
I hear ya and having exhausted my pile of put options money over the last 3 years I wish you luck. This has been going on for a while though, just make sure you’re not the guy that someone else two years ago was saying the same thing about. The problem will be that there aren’t any more places to hide the valuations from going into uncharted territory that the “pros” can explain away … even against the nonsense 10% forward earnings they always predict and always show up as a fabricated 2%.
“Millennials are in their 30s, the prime age to start investing in the stock market.”
And Boomers are in the prime age to pull money out, and they have a lot more invested than Millennials. I’m not super bullish, more like neutral bullish, and although I think your scenario still has a 10% chance of playing out…. but I couldn’t resist pointing out the obvious counter.
Yes, there are always two sides to every trade, by definition, both for good reasons.
In terms of the Fed, check out what I replied to Richard Martin above. I’ll write about it in detail in the future as the data comes in. I think the Fed actions will level off in January. Repo actions have already slowed to a trickle over the last few days. We might see more clues later this week and later in January.
To me it looks like the Fed doused the market with $400 billion in four months to extinguish the repo chaos, and the repo chaos has now been extinguished.
That’s what the Fed had set out to do, and it looks like it will sit on its hands going forward and watch it as it grapples with a long-term fix (changing regulations, standing repo facility, etc.).
Rydex funds thingy is at the lowest cash—ever.
Some outstanding bull markets have completed in the Dec-Jan window.
For Longing or shorting to make sense, a huge part of your net-worth need to be vested into your conviction . I have seen a lot of people mentioned that they got a 2 bagger to 5 bagger when i asked how much of their net worth has been vested into it .. they usually tell me it is less than 1% …..
Good luck in your call.
If you bet all your eggs on just one trade, you better be young and have a great career and no financial responsibilities, such as kids :-]
By the last recession I had gotten divorced, sold my house and put all my worldly possessions into the financial markets and was living in a shack trying to regroup.
The thing that saved me was I had about 15% in GNMA bond fund that I dumped into stock market when I thought stocks had hit bottom. It wasn’t the bottom, but I got close enough that I did really well and never had to go back to work. I do remember stocks were so cheap that our electric utilities dividend got above 7%. I picked up KO for a steal. I bought mostly index and a few blue chips. I would have done better if I had picked up some junk. I missed our local stock Krispy Kreem. If I remember right it fell from $100 plus to about $1.00. I didn’t buy. It eventually got to $13 or so I think before it was taken private. I missed ULTA. Came so close, but I thought they had too much debt.
I got 97% out of risk when berkshire hit about $185 two plus years ago and I thought it wad fully valued.
Been playing with one stock at a time recently trying to pick up an out of favor stock that is at least 50% shorted. Limit playing around to about 10% of portfolio.
I always bet most of my net worth in a basket of less than 20 stocks, i started this route when i was 21 and have been able to choose what i wanted to do in life when i was in my early 30s..I don’t work for money any more. kids are intangible.
I’m not good at predictions, but I can’t help but sense something negative happening.
I don’t have it in me to short, but I have reduced my positions and will patiently sit on the sidelines.
Good luck to all.
Great article. Hope you’re right and not just so you make $$$. It’s also needed for the general good of society.
IMO real estate will follow a stock market crash. To have a notable, mostly nationwide decline in real estate, I think stocks need to get whacked first.
Meanwhile, real estate continues to gently rise in the Boston area.
Even my best-est most reverend & admired friend – CS – says this too.
My local real estate experience and observations continue to appear correct, despite those forever predicting apocalyptic crescendos based on their convictions getting in the way of facts and links-of-moment, who take issue with what I say I see right in front of my face with my own eyes.
Maybe 2020 will be that time for real estate. But it hasn’t happened yet, nationally.
Happy New Year.
I think one of the biggest myths since 2009 is that real estate and stocks are correlated.
My millennial homebuying friends all have a version of “well if stocks go up my house will go up too but if stocks go down my house won’t go down that much.” And historically speaking this logic is complete nonsense.
My contrarian bet is peoples’ heads are going to explode over the next 2 years as the real estate bubble goes down a little while stocks take off. I think this will accelerate stock buying by the general public, fueling a new stock bubble that won’t pop for 2-5 years.
I probably would have shorted in the past, but I read that Warren Buffet says never to short or to buy on margin.
From reading Warren Buffets writings he has the opinion that the Fed is going to keep making dollars worth less each year so its basically stocks or cash like equivalents when stocks are too expensive to wait out the cycle. He says he doesn’t like longer term bonds because when you get your money back it is going to be worth a whole lot less.
The market is over-valued. Shiller PE is double its mean. However, momentum is turning positive for the market in terms of value. Historically, higher earnings leads to higher stock prices. Confusingly, the last four years of this bull market, earnings have been timid compared to stock prices. BUT it looks like the growth of earnings is catching the stock prices. So the stock prices preceded earnings, but they might not be too far behind. And if stock prices are going to continue to this recent trend of staying ahead of earnings, they could keep going up.
The question is when are these numbers going to revert to the mean? The answer, I think, is when the Fed stops playing its game. Gonna be a while.
My mental picture is it’s a confidence game the Fed is playing. As long as people are working and spending and the govt debt can grow without people worrying about it and inflation doesn’t run too hot they are going to let it run. People get over confident, student debt runs up to crises level, the can gets kicked on entitlements til it’s too big. But there is the Minsky moment that confidence is lost and people panic sell to try to cash out as much of their gains as they can. Selling begets selling. Defaults beget more defaults. Down we go till the reset in prices are done.
I think current thinking is we are going to be in low interest rate environment as far as eyes can see. Who knows?
I hope you used puts instead of out-right shorting. And please buy some cheap out of the money calls on SPY as a hedge. If you aren’t hedged you aren’t trading.
Not-QE, which is definitely QE (balance sheet expansion), is just the start. This is a liquidity driven market now. I can tell you from watching every tick of the market this fall there was absolutely no reason the market should have gone up except for the Feds intervention. It lurched up like a Frankenstein market, all the up moves occuring in the overnight session.
Since the Fed has stated it will continue ‘Not-QE’ until June, and will likely begin real QE if any real economic weakness occurs, the big players aren’t selling. There’s no reason to sell as the Fed has shown it will bail out the markets.
Your perfect set up looked just as good in September, and that didn’t stop the market from heading higher. I think an S&P 500 target of 3500 – 3600 for June is very realistic.
The Fed is now the only market indicator you should watch.
Since August have used Index/equity strangles to open many and glad I did. When momentum picked up I closed the losing side. Sometimes that happened the same day. I was whip sawed several times before August.
I try to get as close to the money as possible but have some out of the money put and call LEAPs on various ideas as well.
It is important to perform your own due diligence for any position. One strategy makes sense with A and not with B. No whining.
IMO, don’t agree on Fed being only input.
You sound well informed so allow me to ask you if I may, at some point, is it possible that the markets take on a life of their own and no longer respond to all of the artificial inputs.
Wolf, best of luck with your trade. None of this stuff to me makes sense anymore and it seems many are relying on mommy & daddy (gov’t & fed) to take care of them. My gut tells me when this all heads south it will do so with minimal if any warning. Happy New Year.
Good luck Wolf.
I am not as brave as you.
I did sell a bunch of stocks I am way up in. But just put the proceeds into the dry powder bin.
Fundamentals have not mattered for a long time.
We shall see when they do.
I share your sentiments.
Personally this seems a lot like “fighting the Fed” which is a dangerous game to play. It also seems like it’s a bit early since rates are still low and possibly going lower. Or the Fed keeps bailing out everyone’s bad behavior (like the repo market, applied elsewhere). That can go on for a long time still.
On the other hand, if you’re 95% long and 5% short, if this trade doesn’t work out then it was just a hedge that you didn’t ultimately need. Which isn’t the worst thing in the world.
Happy new year everyone!
After every boom comes a bust- for nothing really is that new under the sun.
All it takes is the right tap and the jenga tower falls down.
Like Trump going hardcore after Iran again.
America has entirely failed in the GWOT- we could have rebuilt this entire countries infrastructure for what we wasted on people who hatez us.
But nothing stop the great dow! and mighty S&P! and the cubes are glorious.
A bubble in what should be a 3-6-3 world.
A “trade” had FASB reinstated mark to market. Mistake is using 2009 traditional investment metrics / analysis. Fed & Euro Dollar influence is great and make tails longer than can be imagined. Capitulating markets are wishful bets. Otherwise wishing you luck on your speculatiion. Tick Tock
I’m missing something here. It’s taken me years and years to put together an investment portfolio. Decades! Why would I see now and especially what would I do with the money? Invest it in CD’s @ 1%? I’ve seen every market bounce back in my long life, why not this one? My holdings are carefully balanced for growth and income, for me, selling is unthinkable.
If the U.S. economy implodes and disappears forever, so be it.
1. A revision just back to historical norms would mean a 50% reduction in stock prices. The NASDAQ lost 90% in the dotcom bubble.
2. Yours, and any other normal “investment portfolio” would be crushed along with it.
3. Your “long life” should be able to remember multi year long recessions. And we have never been this far out of wack with fundamentals.
4. A “1% CD” might not look too bad.
Probably a good bet given impeachment, China trade deal, Nord-2, BREXIT, & overleveraged corporate debt overhangs. Non-bank REPO liquidity is probably bloated.
Sloshing money might list Titanic as iceberg approaches for 2020 port side strike.
Captain Mark Carney has set sail for UN and synthetic growth with Climate Change jingling in his pockets.
Nosebleed evaluations are epic, and Too-BIG-to-Fail is looking like the house of cards it was built to be.
If your shorts fail I, for one, will be surprised.
P = .95 at least IMHO.
Happy New Year, Wolfstreet.
I like the idea shorting as a hedge against long positions. As long as you aren’t net short, it’s not risky at all. In fact, it’s a lot less risky than being too long.The
Wolf, are you saying you are net short, or hedging?
The problem with a NET short is that the Fed is nuts and could do massive QE, or buy stocks with or without permissio n, and make a deal with other banks to go all in. All central banks are acting crazy. They then let inflation run 5% while telling the public it’s 2%.
Legislators have lost control of debt and will do massive infrastructure spending if need be. We are led by greedy spineless worms that think short term, not leaders.
Yes, I’m net short equities. This is not a hedge.
Being short some stocks and being long many others was where I was in late 1999. It turned out not to have been a hedge. At first, my face got ripped off by my short positions. Then my face got ripped off by my long positions. It was a serial event, not a simultaneous event. Worst place to be :-]
So for me now, shorting is a two-step event: first get out of my long positions; and then, if that is not enough, take a short position. I don’t ever want my face to get ripped off twice in a row in a serial event again. But that’s just me.
Thanks Wolf for letting us know WE never learn ;)
OK I will jump in too! but with options on the same index at a fraction of the cost! Why not take a vertical put or sell a vertical on those indexes?
take the risk off your shoulders! Or heck if you shorted them why not hedge a bit with some out of the money puts? If it tanks u still make a load, but if it doesn’t fall that far u got some premium form your put sales. Oh, just be on the lookout for next quarters dividend which u have to cover if your short. I think you’ll come out over the next few weeks.
You said it …the optimism is boiling over..or is it the foam from there mouths?
” If you short individual stocks, the maximum gain if the shares go to zero is 100%, while the maximum loss is theoretically unlimited and can easily exceed the entire value of the bet.”
Buy options instead of shorting, then the potential gain is much higher than 100%.
And the potential loss is limited to the premium paid.
How about rotating to value stocks instead? Isn’t that safer than shorting the general market?
Check out how the Value stocks did vs growth, during GFC! ( Only inverse ETFs saved me then!) Same thing but more puts (Dia, spy and qqq)with hedges with long frame time calls
Now, even so called ‘value’ stocks have bid up, in this everything bubble!
The most surreal market in my life time ( in the mkt since ’82)
I wish your shorts materialize in time and get more money from it.
In 2017, I moved the retirement account from stocks to just money market. The markets are doing excellent. A chance for a crash similar to 2008-09 is very low. There are backstops and circuit breakers to prevent a big slide down. Also, fed and investors with cash will definitely jump in if there is a crash.
Thanks for the help the other day……….as far as shorting the market……..good luck!……..
Then, there’s the allegory of the tortoise and the hare.
The tortoise just keeps serenely plodding along, enjoying his life inside his shell, while the hare sprints here and there, trying to avoid disaster.
For what its worth I think the markets need to take a near term correction in order to set up a major bull run come Nov. 4. The fake “new highs” of that time will be enabled by the fall of the USD (devaluation). Might be a good bet to buy Swiss Francs.
As a financial advisor, I’ve been impressed by clients’ unwillingness to realize capital gains and pay the associated tax–even when they know their portfolio needs to be rebalanced, and they’re going to need to spend the money someday. It didn’t take long for me to realize that’s an additional impediment to the short-term success of value-oriented investment strategies (buy low and sell high): people not only have to overcome their FOMO, they also have to overcome their distaste of writing a big check for taxes. I don’t mind it though–others’ reluctance means that value investing will never go out of style; it’s a winning ticket for those who are wise and patient.
TAXES should never be a consideration in investment portfolio!
(been in the mkt since ’82!)
You’re going to make a lot of money, Wolfster. All anyone needs to know is that by either CAPE or book value, the S&P is priced to provide sub-1% returns. I.e. its ludicrously overvalued right now. The ‘perfect storm’ just hoved into view and you’re on the right side, as long as you can sit on it for 3 or 4 months. As for the bubblicious ‘Fed won’t let it happen’ crowd, the limits of the Fed powers became apparent end of 2018, when they burnt half their ammo to manufacture a lousy 5% 2 year rise. It’s going down, no amount of money can stop it, because ultimate;y,people aren’t stupid, and paying $34 for $1 of earnings is… stooooopid. Best of matey, see you on the other side!
Nobody knows. Beware of those who think they do. There are times when all of us are helpless. Only the most courageous will accept that reality and they will be the survivors….. for a while, perhaps.
Quote from article:
“Shorting is socially frowned upon. It’s like you’re willfully trying to destroy people’s constitutional right to the pursuit of happiness.”
Because it’s gambling rather than investing in a business. All gambling in the market should be on another exchange where it does not directly affect the stock and bond markets. Just bet on prices like a numbers racket. No need to buy or sell.
There is nothing sinister or un-American about having an opinion that a stock is overvalued and betting against it- i.e., taking a short position. What is un-American- and illegal- is doing so if your broker has not told you there were shares available to do so- i.e., naked shorting. The only ones allowed to do this are “market makers,” and interestingly some of these are in hedge funds owned by…drum roll… the banks that own the Fed. So for anyone at the NYSE, where specialists are allowed to short stocks ,to make that statement is worse than disingenuous.
It reminds me of those dolts who say you don’t support our troops if you don’t support a decision to go to war.
Or those who think that cancelling unspecified future tarrifs constitutes a victorious trade deal.
At what % do stop loss.
Fighting the fed to me is nuts.
They all the bullets and guns they have not shown you
Best of luck.
Best of luck, Wolf, but don’t think this is March ’00. The Pets.com then are quickly dispatched now aka WeWork.
Best for 2020…PJS
It is worse than in 2000, 2008 and even 1929!
May be it is different this time, right?
No one rings bell at the beginning of a BEAR mkt!
Oh boy, I’ve waited, waited and waited for a trade to line up to what looked perfect, only to get creamed on several occasions. Experience has taught me to put the greed monster in the back seat and budget using Martingale. i.e. divide your investment cash on a trade by ‘at least’ 7 and start with that 1/7th $ amount on your trade. If the trade continues against you then double down. And if it goes against you again, you still have enough to double again and your break even avg will remain very low
Starting with $25k, Buy 1 would be $3571, Buy 2 would be $7143, and Buy 3 would be $14285. For each buy, wait for a ‘big 2 day’ move against your position to add….never add if it’s going your way or at a similar price. Even better, keep only your largest and lowest lot while selling all smaller higher positions when they get back to breakeven.
It’s soo easy to have a good feeling about a contrarian play and just go all in but experience has taught me that, that good feeling is hubris, not insight.
Plan the trade / Trade the plan and budget, budget, budget.
Yes, averaging down a losing trade, that’s the ticket to ruin.
I started shorting gold at $1350/oz (with 3x leverage) using my entire my 401k. It’s now $1517/oz and I’m presently about 15% down and HOPING it heads back up to $1535/oz so I can add the next leg of the short. I’m budgeted for $1700/oz so if it hits that and falls back to $1500 I’ll turn a nice profit. When it gets back under $1400 I’ll flip and start a small entry long position but budget for $1160/oz.
Seems like, you might as well just write a ‘put’ option at a far off the money you care to buy. If if does not get assigned, then it’s rent collection.
If if gets assigned then ride it on the way up and sell. Look at it as a discount. This is not an advice ok.
This 1/7 entry and double down on loss is a great strategy.
I have tried trading 3x ETFs, DUST and SQQQ to try to get leverage without option decay.
I found that averaging down after 20% loss, and not before, helped.
My conclusion however was that these ETFs were a gold mine, but not for the punter.
The decay is also huge, like options.
FYI, On 3X’s like NUGT, DUST, JNUG & JDST I divide my investable capital for a trade by 15 instead of 7, as leveraged ETN’s require a lot more caution than an unleveraged play such as and S&P 1:1 long or short.
My personal rules…
– I buy for every >11% drop a Gold miner ETN falls; just before market close.
– I NEVER add at the same price or chase after higher prices. For example, I bought my first entry position in DUST at $5.33 and Gold tonight hit $1611/oz yet DUST hasn’t fallen below that (after hours). I won’t add my 2nd buy under any condition ‘until’ DUST closes below $4.74 no matter how high Gold goes.
– I always / always place a GTC limit sell on all higher (smaller) positions to sell if/when they get back to break-even, and then turn around and place a stop-loss on 1/2 of the shares in my one ‘best’ largest position incase the price falls back down 11% again. If you have an ETN’s rally up 11% and fall back down 11%, it’s an indication it’s going lower and not retesting support. By unloading high positions break-even and seting a stop on 1/2 shares of my best one, I’ll have the cash to add yet another leg to double-down.
– Measured against GDX and GDXJ these 3X ETN’s decay around 2% a month but vary with volatility. Most incorrectly (and unwisely) measure them against Gold and don’t realize that they’re sentiment based and ‘front run’ not ‘follow’ Gold. Conversely UGLD, DGLD, USLV, DSLV of course follow Gold & Silver in lock-step, and decay slower at about 1% month.
-Mathematically anytime a buy is doubled as it falls by a set percentage of price, the break-even point will remain half way up from the ‘last’ position purchased. So for example when I double my buy for ever 11% an ETN falls , my break even will remain 6.5% (half of 11%) up from the lowest and largest position I last bought. So if I divide my cash by 15x and start buying at $25 a share, I can buy my last lot at $15.68 and my break even cost across ALL positions will be $16.70.
-What happens if I run out of cash and the price keeps falling? Well nothing falls or rises in a straight line. If I get to my last buy and the price rallies, I have a fair chance at selling the entire position at break-even and then starting over at that much lower price with Martingale all-over again. If not, then as long as I sell sooner vs later then I usually can do so with between a 6.5% & 11% loss; and will start over again with Martingale from there. Had I instead done something stupid like gone ‘all in’ on that initial $25 share price then I’d be looking A) taking a 37% loss and B) leaving the table all-together to potentially miss out on massive rebound rally.
As always, this is not financial advice and is meant only for entertainment purposes.
If you sell at a loss you’ll be disappointed.
If you sell at a profit you’ll be disappointed you didn’t make more or missed out.
Investing is an extremely inefficient process. It’ll always involve leaving money on the table, so be content with any profit earned.
It takes a lot of confidence (and thick skin) to publicly announce a short position like this when you have a large audience. There are some who will mock you to no end if the trade doesn’t go perfectly and will dedicate their entire lives to sending you hate mail and hate messages. So I can’t emphasize enough how much I admire this post. Just look at the comments so far. It’s fascinating to read various readers’ opinions on this topic.
I get the sense that there is overconfidence in the power of Fed balance sheet expansion. A year ago, the market rallied to new highs despite the ECB starting to shrink its balance sheet while the Fed was shrinking it as well. The Fed was merely hinting it would ease in the future at the time. But it was doing the opposite. Yet the market still kept rallying. During the dot com crash and the housing bubble crash, the Fed kept easing while markets imploded. In all three examples, we saw inverse correlations between Fed easing and market performance. The market is much more based on psychology than we are willing to give credit for.
I tried to short a stock about 5 years ago just for the purpose of seeing how it works. I think I picked Harley Davidson and and I got charged hard-to-borrow fees almost immediately. After two or three days, I calculated that if the stock went to zero after a year, I would still lose money because the fees were so high, so I covered the short as soon as I had done the math. I’ve heard that professional investors have ways of shorting stocks inexpensively, but for a retail investor, how much does it cost to short QQQ or SPY? Isn’t the loan fee whatever the broker wants it to be on a given day?
“It takes a lot of confidence (and thick skin) to publicly announce a short position like this when you have a large audience.”
Yes, this is a very uncomfortable place to be. But I’m used to being in uncomfortable places, as I tend not to toe the line. The risk is that in addition to losing money on the trade I will be mocked for being this stupid :-]
No, you are not stupid Wolf.
The Shiller P/E is 30.9% as I type. But, the historical high of 44.2 does leave room to go up.
We are 81.8% higher than the historical mean of 17 on Shiller.
And the Q-Ratio is at it’s second highest level (y 2000)
Some people keep a journal for recording each trade. I think this helps you not second guess yourself.
Also I have heard that if you short you should pick a time limit for the trade.If the time limit expires then your reasoning was flawed.
Agree with the time limit. Indicated that in the article vaguely, second to last paragraph.
I think your call is really really early. Probably a better call towards the end of 2020.
I also disagree with you about the fed sitting on their hands. The supply and demand for not QE is in perfect balance and should continue going forward.
I wonder if Fed policy isn’t more about saving Europe. Whatever problems we have, Europe seems a bit worse as far as growth, missing inflation target and demographics. Seems like US started it all with the housing debacle and being reserve currency needs stability in Europe to keep the boat sailing. It just seems like the central banks haven’t hit what they think is escape velocity yet. Could be they should have told us we were broke and were going to have to earn our way out of it instead of print our way out.
Wolf, do you have buy stops in place if this trade goes against you?
It takes a lot of confidence (and thick skin) to publicly announce a long position on the market after a 10 year bull run with current RICH valuations does it not?
Fed will not knee-jerk into QE. The EU has the lead on this, and they seem about done with NIRP. Fed is forced to maintain neutral to higher interest rates, with GDP north of recession level programs. Those three rate cuts were a mistake and Fed has printed their official apology, even if they are deflecting the blame. https://www.federalreserve.gov/econres/feds/files/2019086pap.pdf The Republican president from 2000-2008 had 13% stock market gains over eight years. Imagine this president gets reelected, and the market loses 50% between now and 2024. Same result.
Back in 2008, Goldman was predicting double digit market gains. Instead, the SP500 lost 37% in 2008 alone. Point being, everyone is clueless to the timing of the next crash, so we take educated guesses, as we are all gamblers at these levels. That said, I think we will be reaching some hard limits around SP500 3840 (Future returns zero over next ten years), and the all time low future returns would be 4250. It will take a lot of animal spirits to get there, and some luck in election events in 2020 (Feb 3rd, March 3rd, July 13-16, Nov 3rd), along with no inflation scares of any type, and no spikes in corporate bond rates. Worst case I think the markets fall apart between July 13 to Nov 3rd 2020. Best case is current pres wins Nov 3rd and we do not see a correction until late 2021 as for some silly reason, the current president thinks markets are a popularity vote and will do “whatever it takes” to keep this dog and pony show going (strange being that the top 10% own 84% of all market structures, so 90% of the population is not affected by Dow 50,000 or Dow 10,000). I hope we hit 4000 on SP500, not for the 25% gain, but the 40%-70% future drop. It could be the last market drop over the next 20 to 30 years, as the Fed will most likely “Japan-if-ication” the USofA from that point until it all falls apart on a global scale, in some manner that will be obvious only in hindsight.
Enjoy it while it lasts, as this market is running on pure human emotions and the “Hopium” that the Fed is omnipotent, praise be thy Fed, Amen…=)
Fellow Wolfsters, this Bubble is just getting started I’m afraid. There is very little hope out there for the 90% and this is the time where the masses capitulate and finally just go for it. The deplorables are busy buying out all the lottery tickets & anybody with any means already holds a stock heavy portfolio, or is a FOMO’d Millennial who is getting ready to go ‘all in’ on the US Equity Markets, along with all the foreign capital. The world is awash in liquidity seeking return.
We haven’t hit the “euphoria” ending that Sir John Templeton spoke of IMHO. This is going to be the blow off top of all time and is, ultimately, going to end with the downfall of the USA.
So, talking about equities, there is still value out there. I’m a broken record here but look at IMBBY, BTI, BP, KHC. I’m also starting to look at OXY. OGZPY will be a good one if it pulls back into the 6’s. Of course one needs PM’s & some Gold Miners (GDXJ & GDX) and some significant portion of their portfolio in T-Bills and Short Term Treasuries. These are really hard to hold psychologically right now because of the FOMO, but the optionality IMO is well worth it when this epic bubble for the ages finally, and it will, blows.
Good luck to you Wolf. If there is any justice left in the Universe you will do well, while the Kleptocrats that orchestrated what will end up being the demise of our Republic would be made to suffer.
Re colorado king
I agree with much of your post except
the demised of the U.S.A
Too much weaponry.Watch out if America
ever gets involved in a fight they care about.
I hope that I’m wrong about the demise part. Unfortunately, the weaponry of which you speak will, most certainly, play a large role in the demise part, if this thing goes truly south. To say the AR15 is in “Common Use” would be an gargantuan understatement. This and the extremely large cohort of disillusioned and disgruntled combat veterans capable of effectively wielding this aforementioned tools could make they Balkans look like a fvcking Kiddie Show.
I guess this would finally put most portfolio concerns pretty much on the back burner for awhile, if not permanently.
Happy New Year
Would you like to share with myself and your other readers how much (roughly) of your entire net worth you are allocating to this trade so we can get an idea of how relevant this trade is to you ?
More than 50% ? less than 1% ?
I know Fred Hickey has been telling his readers for years that he has been busy shorting tech stocks like Salesforce.com, Semis etc. and all the while adding to his collection of gold miners. He’s a great investor and great newsletter writer, to be sure to be sure..
Let me summarize here what I replied to stockkid81 and Bobber above – since there are a lot of comments already, and it’s easy to miss stuff. I think this answers your question indirectly:
To stockkid81: If you bet all your eggs on just one trade, you better be young and have a great career and no financial responsibilities, such as kids.
To Bobber: Yes, I’m net short equities. This is not a hedge. Being short some stocks and being long many others was where I was in late 1999. It turned out not to have been a hedge. At first, my face got ripped off by my short positions. Then my face got ripped off by my long positions. It was a serial event, not a simultaneous event. Worst place to be.
So for me now, shorting is a two-step event: first get out of my long positions; and then, if that is not enough, take a short position. I don’t ever want my face to get ripped off twice in a row in a serial event again. But that’s just me.
You know if the stock market quickly sells off by 50% plus we all can say we knew Wolf before he was rich and famous.
All kidding aside. Its obvious to me that you really are a sharp cookie as people used to say. The amount of quality content and just being motivated at this point in your life to try something new. I like visiting and throwing wise cracks out, but what you do is high quality work. We are all fortunate that you want to do it.
Brave move, Wolf! May it make you a mint, sir!
I made my money by shorting the S&P 500 back in Mar. ’07, and covering Nov. ’08. It was a wild ride, waiting for my bet to pan out.
The arithmetic on shorting, as I see it, is this: sell short at $100 today, buy/cover at $1 tomorrow, gives a 99X return (9900%) (bought at $1, sold at $100). Yes, you only gain, in absolute terms, what you sold short, but the percentage return can be near infinite (i.e., much greater than 100%).
Me, I am short TSLA and Alphabet, just for shits and grins. I learned firsthand over ’09 through today — very painfully — that logic has no place in the market, today. My sense is that there may be a market correction. But, I also read between the lines of news (yes, I follow Q Anon, and kindred spirits like David Wilcock) that otherwordly forces (literally) are working with folks here on Earth to overthrow The Cabal, which runs the Fed and world. Sounds nutty, I know, but I am a guy who goes out once a month with a small group of engineers, a physician, and others to look for UFOs up in the night sky and signal them (via laser) when we see them. They often signal back to us!
Best wishes to you in 2020, Wolf, and keep up the great work!
Oops — and that those otherwordly forces may only allow a correction, and not a crash, as there are lots of innocent bystanders who could be hurt in a market crash.
Who knows, we’ll see soon enough!
Mmmm. These ‘Otherworldly forces’ must have been on holidays in 1914, 1939 etc etc etc.
More likely ‘what goes around..’ but on such a large scale it’s beyond our comprehension.
To short the ENTIRE market wouldn’t you need like a brazillion dollars?
There is an app for that.
Stocks may be overpriced. Somehow the S&P 500 always rose over the long term.
It is better to rent than to own in some areas, especially if you move within four years.
Dear Wolf, how many beers did it take you to make this decision? They say Cesar would grant 3 litres of vine per soldier before battle. It seems that vine is not only truth but also courage. :)
I avoid drinking beer, but if you add a vine glass to your sales I will get two.
Very interesting and bold to make a bet like this. I suppose a large part of it is how much of your net assets you are betting on this. After all, play money is one thing. If I had to guess, this is probably nothing catastrophic if you had to pony up to meet margin calls.
Although one thing I’m curious about is why you’ve decided to use an open ended short bet rather than options. The latter has the normal downside associated with the need to get the right timing and fighting against time decay. I suppose one alternative to this is to set up on long bet where the expiration is sometime in 2021 or 2022. But that could be costly depending on the situation, with the certainty of losing all of your money should your bet go against you. The upside is that you’re using leverage to minimize your own exposure.
So, just curious, if you shorted as you did, did you also buy options as a hedge against the market moving in the opposite direction?
The indices don’t move as much as individual stocks can. They’re not going to jump 20% or 30% in a single day. So the risks for me are lot more, um, contained. And these bets are unhedged. If I thought I would need a hedge, I wouldn’t do it.
There is a theory for why there are blow-off tops. So we could have one. That would be painful for you, but there probably 999 chances in 1000 that no matter how high the market goes it almost certainly will fall below your buy level at some point. Have you thought about at what level you would take the trade off and realize your gains or will you have to wait and make a judgement call.
It’s a good bet, but it’s still a bet.
You know this stuff better than just about anybody and if anybody can pull it off, you can.
Make us proud.
Care to comment if you have a stop loss in place and at what price?
No stop loss. These are big indices. They don’t jump 20% or 50% a day. They move up in the range of +0.1% to +4% a day. A +4% move is huge and not common. If I get cold feet, I can leisurely cover the short any time.
A one off jump to kill anything is not easy to get. Most likely to see these are biotechs, Or if there are more extraordinary circumstances like 2008. it’s more the drip drip drip of losses that hurts. But seem like you have a plan in place for this.
I’m starting to pay attention to biotech as a potential opportunity ;-)
” If I thought I would need a hedge, I wouldn’t do it.”
Your statement tells me you will ultimately lose in the markets unless you correct that kind of thinking. That’s magical thinking Wolf. The markets have fundamentally changed. It’s a vampire market that feeds on shorts and is waiting for more share buy-backs and Fed action.
No one can predict the future.
Stock fundamentals and valuations are now meaningless.
If your’re placing your bet becuase of Ed Yardeni’s call, I’d say good luck with that. He’s the ultimate insider so you should do the opposite of everything he says.
It’s safer in this market to short individual stocks (if you’re playing the over-valuation game). The indicies are heading up based upon money flowing into the FANG type stocks.
Big mistake wolf 3600 is the number marl my words
our modern economy…
….Such companies sound dreadful. In tangible, material terms their share certificates aren’t even worth the paper they are written on. And yet, incredibly, a “negative-value” fund, composed of the shares of companies with negative tangible book value, would have beaten the main U.S. stock market, represented by the Russell 3000 Index, by 24% over the last 20 years. That outperformance has almost all happened since the financial crisis — before that, the negative-value fund had roughly tracked the benchmark….This should be of concern because it suggests that capitalism’s process of creative destruction isn’t working. Zombie companies tend to be less productive than others, so their survival may well be a part of the explanation for the low productivity that has bedeviled the West since the financial crisis…All of these factors, I believe, are at work in the rise of negative-value companies. In all cases, a return to higher interest rates would bring this group great difficulties. Zombies and companies hollowed out by private equity would face an existential crisis, while we would see how well the new immaterial giants could cope once money had a higher price.
The “immaterial giants” in software, entertainment, pharmaceuticals and medical devices wouldn’t be giants without their government-granted patent monopolies. For the price of Solvaldi sold in the US, one can fly to India to fill the prescription and have enough leftover for a nice down payment on a house.
None dare call it state-sanctioned plunder, and it’s only one of many. Evidently the goal is to rob US citizens until there’s nothing left to steal, the country’s biggest industry.
So, lenert, with that kind of thinking, why not get a few prescriptions filled, return, and sell them thru a black-market operation. And, if you really get this rolling, you could short Gilead with some of your spare change.
Very dumb move. Trump’s Navarro just predicted 32k on the dow and probably even higher for the coming year.
Has he got a special crystal BALL?
The higher and longer this bull market goes, the more people are going to be tempted to short it, expecting a crash, even though it can be dangerous.
Still, I think the tells are peeking. Maybe we should start a list, if it may help to establish a time frame for a correction (or crash) by identifying what those tells may be.
1) The Fed’s reversal of it’s interest rate policy. If they believed the risks were minor to the economy in general, and the financial markets in particular, why change course?
I’m out of the market but I still keep an eye on these things. The last thing I want is a quarter million people banging on the gates looking for a handout.
Pre-mature ejaculation. Hmmm, you may get your face ripped off………again. Until the number of 52 week lows exceeds 80, ideally consistently, you’re too early.
Personally, I just had the best quarter of my life.
“Personally, I just had the best quarter of my life.”
Hahahaha, you passed this info to me too late. I wish I had known that yesterday. I might have doubled my short position :-]
Funny guy. Greed is the denial of risk.
There is an element of seasonality in terms of inflows. Each month the first 6 days brings in ETF and 401K money. First of each year has an added impetus.
The intra-day high on the S&P on January 31st is your peg.
Shorting is the province of market makers f/k/a specialist. They have a normal day to day inventory posture AND a tax advantaged omnibus account which can utilize up to 20 to 1 leverage.
When the bond market (both zombie high yield and Treasuries) make a mass exodus, just WHERE will the proceeds go?
Since you’re going to pound your chest and expressed a willingness to Martingales. please KEEP US POSTED ON YOUR EVENTUAL OUTCOME I 4-1 will remain on the edge of my chair funny guy.
Will you be realising gains? Why or why not, and how much?
I’m getting very mixed signals from various quarters but not much in the way of cogent reasoning, so any analyses from random sources could provide some insight. And it seems more than a little weird that a large majority avoid mentioning any rationale about how long and how high debt can go, even though it’s ballooning in all sectors. Risk is general seems to be largely unrecognised. The reek of irrational exuberance is getting palpable.
It’s funny, realizing your gains can some time even be tougher than taking your losses. There is always FOMO. Don’t know how many times I actually wish I held on…. it’s actually more than I wish I had sold.
I shorted oil around last Christmas and made about 1 month’s income in a day – considered holding it another day and decided against it. If I had, I would have made about 3 months income. Sure the “missed gains” were a mental kick but had to remind myself that I just made a month’s income in a day already. Being too greedy will eventually catch up to you in my experience.
me too, huge bio symbol moves….more of that coming….
just play the sectors and follow the big money…..
simple it be….
You are likely ‘on the money’.
I’m a financial ignoramus. Been totally out of market since before ’98.
Hearing my sibs crow about their gains in that time frame had me thinking about tip-toeing back into the market this year.
I’m one of those contrarian indicators?
Hearing my sibs crow about their gains in that time frame had me thinking about tip-toeing back into the market this year. I’m one of those contrarian indicators?
No, you’re being tempted to go long at the top of a market. Bad investing strategies are so common they don’t seem to correlate with anything.
1.Most of the dollar gains in the market during 2019 came from AAPL and MSFT.
AAPL by itself has a market cap greater than that of the entire oil industry.
2.Many so called value stocks had a poor to average year, but are still too expensive for someone like Mr Buffet to purchase.
3.The number of bonds in the lower realm of the B ratings has escalated resulting in the probability of massive $ amounts being downgraded to junk status.
Many funds are not allowed to own junk bonds and will be forced to sell such bonds if they are downgraded
4.Stock buybacks have been the the ONLY net buyer of stocks in the current market cycle. Buybacks are projected to be lower in 2020 than during 2019
5 The number and dollar amount of stocks with negative book value has grown vastly.
These stocks are what I call “catch 22 “ stocks because investors seem to be willing to finance their negative cash flow as long as the companies stock stays high. Will these same investors be willing to finance negative cash flow when these stocks are tubing?
6.The political schism between both parties are almost at a civil war level.Is this a background for further stock gains?
7 . European countries are starting to raise rates from the ridiculous levels of NPR
8. The January effect tends to be bullish on small caps and not so much on larger caps represented by the S+P.
1. The Fed is flooding the market with their repo operation.
I do not understand the reason for them doing this except it seems logical that one or more of the big banks or leveraged hedge funds has a large short term liquidity problem.
Selling short has a few disadvantages over buying stock.
Any gains are subject to regular income and not the capital gains tax.
Short sellers are liable for any dividends that are paid by companies that they ( or the index that they are short) pay out
At times it can
be hard to borrow stock to sell short. Sometimes it actually costs to borrow such stock.This borrow cost can destroy the economics of any short sale.
Given all of the above arguments , the odds are approaching 100% that a significant correction will start sometime in the first quarter .The only question is from what level and when this correction will happen
“BULLISH argument 1. The Fed is flooding the market with their repo operation.”
Yes, the Fed was doing this in 2019, massively, but it appears to have ended. The Fed drained $64 billion today via a reverse repo — the opposite of a repo (the Fed sells Treasuries and gets cash). That was a huge move. The repo rates were calm yesterday and today, unlike last year end. So it seems the Fed succeeded in bringing the repo chaos under control, and it’s balance sheet may no longer grow going forward. We will get more data on this later this week, and over the next two months.
Nothing goes to heaven in a straight line?
Happy New Year!
My thanks to Wolf and his team for these articles. They are informative, & add balance to what the marketing/political media feeds us.
I also appreciate the audience for taking their time to share their insights, often with passion and respect. Some reinforce my thinking while others cause me to expand beyond my comfort zone.
My congrats to Wolf for nailing 4.5 of his 6 predictions for 2019, and for his courage to adhere to his convictions & short S&P 500. His views align with those by Hussman & others.
I have mixed feelings about shorting the market B/c I want our beloved USA to do well. On one hand, I hate the suffering to the Main St from a brutal hit to market, and on the other I sense that taking our medicine sooner is better than later.
To all, I wish a safe and happy New Years, that our country readopts integrity, respect, courage, compromise & values. It’ll be great if we make a little $ along the way too ?
Sandy, thanks for the good wishes. Your comment: “To all, I wish a safe and happy New Years, that our country readopts integrity, respect, courage, compromise & values.” reveals your dislike of the current leader. Nicely subtle way of expressing an opinion. Too bad most of the GOP do not recognize the absence.
The S&P 500 had basically “no gain” from Sept 2018 to Sept 2019. The 200 DMA was around 2770. The price was peaking around 3,000.
This Sept – Dec, while the Fed Repo goes on, the S&P went up around 10% from about 3,000 to 3,240. The 200 DMA is about 2,965. That’s 275 points away (down) or about 8.5%.
Since I assume this is a liquidity driven rally, then what will it take for it go down to at least the 200 DMA level? Since the Fed is already handling Repo and is on a non-QE expansion mode, then it has to be something big out of left field. Something we don’t know yet.
Considering I have no idea what will cause a downturn or when it will happen, I am just going to keep my powder dry and get ready to back the truck near the dip on the way up above the 200DMA. I think the Repo story is finished. I have no idea how the Fed will back out of this, so I will wait and see.
The way I look at, many people buy insurance encase of disaster. Shorting is the same. I would gladly have a percentage of my money in the QID short nasdaq, mind you not all my eggs. If all goes to hell in a handbasket then at least the short is a counter balance to limit the losses..
You have it reversed.
Insurance is needed as a hedge if the market keeps on going up for no reason other than liquidity provided by the FED.
Once the market starts to price in expectations of much lower returns in the future, rationality will prevail
Seems about 50/50 Wolf’s short v the longs with quite a few on the sidelines.
My goal would be 60% PM’s, 20% cash, 20% land – not a cent in the casino – and sleep like a baby.
Suspect we’ll discover winners/losers by end 2020..if not before.
Normally there’s a considerable lead time between the high in Breadth (as measured by the daily advance-decline line) and a sustained market decline. This lead time can measure several weeks to several months. The only exception, of which I’m aware, where Breadth topped coincident with the General Market Indices occurred in November 1968. That high didn’t precede a crash but a sustained decline, first into May 1970 and eventually into the lows of December 1974.
The reason I mention this is that, according to my figures, Advance Decline Line recorded a new all-time high Monday, Dec. 30th.
The difference then was the gold standard.
As usuual, you expressed your rationale in terms of a well-understood cycle, Wolf.
What makes me wary is all logical explanations (“setup is just too perfect”).
I myself had an “aha – moment” in January 2018, when I saw the surge. I decided it was a final blow-off top and I sold everything I could. Never looked back. But this was not logic :)
Anyways, wish you luck with your shorts and Happy New Year!!!
Dow will hit 30k before any serious pull back.
Shorting this market is a losing bet imho.
The Fed is injecting huge amounts of money that has no other place to go but the stock market.
I am will take the other side of the bet any time, Wolf will lose money on this.
Although Wolf would only lose money if he covers. I think dow will hit 30k too, but he doesn’t need to short at the exact top, if a 30% pull back happens in the markets
For every indicator of an impended financial market correction there is a countervailing indicator.
This does not mean there is balance in The Farce. It only shows that the distortions have so far been manageable. But the distortions are still there, and they haven’t been going away, so they must continue to be managed. To keep the markets from crashing they must be rigged, and so they are, but there are limits to how much they can be rigged.
Generally speaking, financial markets crash because distortions create the conditions which enable a triggering event to bring it down. And yet, the markets have shown tremendous resilience against several potential triggering events: Fed policy reversals, booms and busts in several industries, tariff follies, assorted environmental disasters, the 2015 Chinese fiasco. And yet, every time the markets swooned they recovered and advanced.
So while the conditions which would enable a crash now are the same as those which were present in the last crash, they have so far have not enabled a triggering event. That appears to be because the markets have been supported the same way they were caused to recover after the 2008 meltdown, with debt, escalating in all sectors, which allows the markets to withstand triggering events despite the underlying negative conditions.
This suggests that either underlying conditions or triggering events, or both, have not been sufficient to induce a crash. Which leads to the question: how negative do the underlying conditions or triggering events, or both, have to be to cause a crash? This leads to a second question: are such conditions or events on the horizon?
This also suggests that conditions surrounding debt are key to understanding when a crash will occur, because debt is what’s keeping the system going. But perhaps it’s only a suggestion. There are two sides to debt: not only is it keeping the system going, probably the only thing, but it is also worsening the conditions which will enable a triggering event to induce a crash.
Debt continues to escalate, and in time will cause conditions to become so unbalanced that the system will simply fall over, even without a triggering event. Once loan defaults become so sufficiently pronounced that more debt cannot compensate for them the markets will crash. So while you’re watching for potential triggering events, like Brexit or tariff shocks, you might also like to keep an eye on loan defaults. Conditions are worsening, and the Fed is far from omnipotent.
The clear sliding of the EM’s into ‘de-growth’ (or is it just ‘non’growth’? oh dear, so many euphemisms these days for collapse…) might well constitute that trigger for an unstoppable wave of defaults.
Let’s see: it’s not going to be dull is it?
Live to the point of tears.
– Albert Camus
“In the midst of winter, I found there was, within me, an invincible summer”
– Albert Camus
We have a sitting president calling for dollar devaluation and negative interest rates. In result, this bubble is going to get a lot bigger, a lot fatter and a lot uglier before it ends.
I expect a market pull-back in January which I will consider bullish moving forward.
I expect the Fed to fully support the market as long as inflation is south of 7%.
exactly, 3155, tough slugging starts at 3170….then up to 3500……
no better place to put your money right now…..FOMO has long ways to go before topping….
It is human nature I guess to try to take advantage of something juicy but isn’t that the same sociopathic motivation that rots our culture including the corrupt FED that brought us to this point? Counterfeiting the world’s common currency is a crime no matter how you try to justify it. And that means innocent people have been plundered unjustly. Their blood provides the juice we crave. Maybe 2020 should be the year we short the market to crush Injustice and to rebel against our slave masters at the central banks. I suspect that would put fear into their hearts where it belongs once again. Who will take The High Ground? Or does it even exist anymore?
Things are gonna change, I can feel it.
Get crazy with the Cheeze Wiz.
Money for nothing and the shipping for free.
Every now and again you just have to play.
From 2010 to 2016, world central banks won’t allow market fail.
From 2016 to 2019, Trump redefines economy/capitalism as stock market price, and Trump use TAX cuts for corporations to keep that score high.
From 2019, trade war. stock market price is national security issue. US can NOT go cheap before China is broken!
Wolf, if you short the S&P today, you are going against those who maintains national security, or you are a racist, white nationalist, and a bunch of ME2 will show up and accuse you of assaults. And you are helping China.
I remember shorting the banking sector in 2007. I thought I had nailed it when the market crashed. Then they halted trading, and by the time I could cover, all my profits were gone and then some.
That taught me about the risks in playing a rigged game…
That is the problem with the markets…….the US of our youth is gone……fair pricing and price discovery are gone……..the generation of everyone wins is in charge and pain is a thing of the past……this fed is insane. We will drift into a disaster and wake up in a nightmare brought to you by your smiling thieves at the fed and congress.
Very little difference between this fed and Stalin.
If you can’t see a difference between the Fed and Stalin, you may need some psychedelics to clear things up.
well, I’ve been on a stock picking roll this year with amazing returns…
you might get your little down move to 3155 but I would expect to end May near 3500spx
my homeruns were AXSM and ITCI, lots of doubles and triples to boot
wall street and the bankers like the current state of affairs…..they will push this to get Trump re-elected. No elite wants to elect a tax cut on themselves….
Mr. Richter gambling with the beer money again.
1) If u buy SDS, TWM or QID u are long, not short. 2) When then trend is up, u lose. When the trend is down u win,
u can gain > 100% in a short time and u get, not pay dividends.
3) The monthly NASDAQ might be a thud :
Take Mar 2014(H) @ 4371.71 to Apr 2015(H) @ 5119.83 // and the
bottom in between on Oct 2014(L) @ 4116.60. After doing monthly
4) The support line is at about 8550.
5) If support is breached, the NASDAQ might rent an open space,
down below, for a limited time. This open space was created
between this channel
and a 38Y resistance line of the LT chart I gave u few days ago,
currently at about 7680, on Jan first 2020. The support line of the 38Y
channel is far below….
6) Those lines don’t care about the Fed, Putin, Xi, AOC…
7) Happy new year 2020.
The ‘stock market’ has little to recommend as ‘secure investments’.
Just looking at the charts of the DJIA suggest a monumental bubble which could collapse with investor confidence games, a collapse in the underlying currency, a collapse in the economy as citizens refuse to believe what they are told anymore, or a collapse in the environment. How is the Aussie market these days?
So I believe the best ‘short’ is to remove your money from stocks, bonds, and any other paper investment.
Invest in something real. invest in a local business where you know the people and the market. Be satisfied with small, reliable gains.
Invest in something real.
Yes Sir. You may or may not be pleased to know that I’ve finally completed construction of a new boring bit so we can continue to route utilities through the stone. It takes time to sinter the cutting elements and the bits don’t last as long as the time it takes to make them. I’ve tried to minimise the time spent researching investment short strategies, but some people here are into that sort of thing, despite my cautionary opinions, so until they start losing their asses they’re just going to keep doing it.
This trade is already in the RED.
New Year might be the VERY WORST time to short
Stock Index Futures are soaring out of the gate and it’s NEW YEARS DAY.
Gonna wager you will be out of this trade by this weekend….
Losses are going to be substantial.
Fat lady not even warming up yet, dude.
I think she’s singing “MARGIN CALL”
Wolf not answering his phone – as the margin clerk calls.
I just put some excess cash to use, plenty of excess cash left to absorb losses and do lots of other things with, if the opportunity arises. I’ve got liquidity coming out of my ears for just that reason. This is not a leveraged bet.
S&P futures down 0.6%.
He’s already explained how he’s made the bet. Worst case he loses what he stuck in. Dude. What’s interesting is that by almost any method of valuation, the S&P now is priced to probably deliver 1% or less returns for a freaking decade. It’s so expensive right now, it’s an almost guaranteed loser over any ‘investment’ timeframe aside from swing trading / day trading. Good luck with that, yanks, you’re gonna be forced to look outside the US for opportunities now, because you’re deuced on your own doorstep once too often.